The Quicken decision is out

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It’s not what dirt lawyers wanted or expected

The South Carolina Supreme Court never ceases to amaze when it decides real estate cases. Dirt lawyers seldom know what to expect. We read the precedents. We attend the hearings. We listen to the Justices’ questions. We believe we get a glimpse of what they may be thinking. But we miss the mark. Last week, the South Carolina Supreme Court decided the much anticipated Quicken case*, and if I had predicted the top five possible outcomes, I would not have come close to the actual decision.

I fully expected a 3-2 decision in either direction. But it is a 5-0 strongly written decision. It is a decision that was written to dispose of the controversy. It is a decision that was written to deny the possibility of reconsideration.

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This is an unauthorized practice of law case brought in the Court’s original jurisdiction. The case was assigned to Circuit Court Judge Diane Goodstein as Special Referee to take evidence and issue a report. Judge Goodstein held a two-week trial and issued a report finding, essentially, that no South Carolina licensed lawyer quarterbacked (my word) the mostly Internet-based residential refinance closings. In the facts recited in Judge Goodstein’s report, lawyers were peripherally involved in all of the steps required by State v. Buyers Service Co.** and its progeny, but no lawyer was actually involved in a way that the interest of the borrower was protected.

(Summarizing the prior decisions, the steps requiring lawyers are: (1) document preparation; (2) title search; (3) closing; (4) recording; and (5) disbursement.)

The Supreme Court somehow reviewed the same record and found that lawyers were involved and used their professional judgment in each step. The facts recited in the Court’s decision were not recognizable from the facts recited by Judge Goodstein’s report. The Court completely rejected the report and apparently decided that a finding of UPL under the circumstances would “mark an unwise and unnecessary intrusion into the marketplace”. “Simply put,” the Court stated, “we believe requiring more attorney involvement in cases such as this would belie the Court’s oft-stated assertion that UPL rules exist to protect the public, not lawyers.”

Most South Carolina dirt lawyers were hoping the Court would find a South Carolina licensed lawyer must be at the center of each closing, overseeing each step, and insuring that the consumer client’s interests were protected in each step. That is definitely not what we got.

There is, however, some good news in this decision. The Court made the clearest implication to date (without an explicit holding) that Buyers Service and its progeny may not apply in the commercial arena. The Court repeatedly stated that the context of this case is the residential refinance arena. I have discussed this case with several commercial lawyers to ascertain whether they are now comfortable to forego certifications that other South Carolina licensed lawyers are involved in the closing steps that are not under their control. They seem to feel slightly more comfortable, but not comfortable enough to let go of that step. Perhaps the passage of time will help.

Other good news is that, despite the facts recited by Judge Goodstein to the contrary, the Court clearly stated that lawyers were involved and used their professional judgment in each required step. The out-of-state entities who do business here should make sure their processes include this professional judgment in each step of the closing.

After reading this case a dozen times, I’ve decided that no law has changed. Nothing will change in our local processes. Nothing will likely change dramatically in the processes of the out-of-state entities who do business here. If I had not read Judge Goodstein’s report and if I had not attended the Supreme Court’s hearing, I would probably not be shocked with this result.

I would love hear what you think.

*Boone v. Quicken Loans, Inc., South Carolina Supreme Court Opinion 27727, July 19, 2017

** State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E.2d 15 (1987)

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Multi-state mortgage modification practice may be hazardous to your law license!

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Last week, this blog discussed two April 19 South Carolina Supreme Court cases* in the context of the social media issues they raised. This week, I want to point out the mortgage modification issues, which were, no doubt, the impetus for the discipline in both cases.

Let’s look at the facts in the first case, In the Matter of Bacon. In November of 2012, attorney Brunty hired INMN, Inc., a marketing company, to solicit out-of-state clients interested in modifying their home mortgages. Brunty hired Integrity Partners, LLC to process the loan modifications. Brunty was suspended and later disbarred.

Brunty introduced Bacon to a principal in Integrity, who assured Bacon that Integrity and INMN were complying with federal laws and regulations and had a network of attorneys licensed to practice in every state where clients were accepted. Bacon accepted those assurances and hired INMN and Integrity. (Two people who’ve read this blog asked me about the relationship between Bacon and Brunty. I don’t know. The Court did not specify.)

Handling the former Brunty cases did not go smoothly, to say the least. Integrity continued to work on those cases without attorney involvement. Integrity employees incorrectly advised many of Brunty’s clients that their files had been assigned to Bacon. Some of Brunty’s clients became Bacon’s clients, but some did not. Some of Brunty’s clients’ credit cards were charged fees that were paid to Bacon.

Bacon admitted that he violated federal rules against unfair or deceptive acts or practices in respect to the mortgage modification matters.

The FTC’s “Regulation O” places a number of restrictions on mortgage modification services. For example, a provider may accept a fee only after the client has executed a written agreement with the lender or servicer. Attorneys are exempt from this rule if they are licensed to practice in the state where the home is located as long as they hold advance fees in trust accounts and comply with trust accounting rules.

Bacon was not licensed to practice in all jurisdictions, so he was not authorized to accept any up-front fees. He also failed to deposit the fees into a trust account, failed to maintain separate ledgers for these clients, and failed to properly supervise the individuals who had access to the accounts.

The Court stated Bacon was involved in the unauthorized practice of law in several states. He was suspended from the practice for six months and ordered to pay restitution to clients.

In the second case, In the Matter of Emery, the attorney received a public reprimand. In 2013 Emery signed a contract with Friedman Law, a New York law firm, to accept referrals for mortgage modification cases. Emery received client referrals from an internet marketing company and paid for the service based on the potential number of clients referred to her. Regardless of the residence of potential clients, cases would be assigned to Emery as a part of the Friedman Law network.

Non-lawyers employed by Friedman Law or two paralegal services worked the cases. The non-lawyers included Emery Law in their signature blocks and used Emery Law letterhead. Other than the fact that some of the non-lawyers employed by one of the paralegal services worked in Emery’s office, she did not directly supervise the work.

For the most part, the non-lawyers worked diligently, but six clients filed disciplinary cases because of some issue or complication resulting in client dissatisfaction.

The Court stated that the written fee agreements in these cases were confusing and self-congratulatory and often contradicted the verbal communications of the non-lawyers.

The non-lawyers sometimes wrongly held themselves out as employees of Emery Law. Clients never knew whether they were dealing with employees of Emery Law, Friedman Law, a firm in the Friedman Law network or one of the paralegal services.

Interestingly, in 2013, the South Carolina Supreme Court held that lenders do not engage in the practice of law when they handle mortgage modification transactions.** In the present case, however, the Court stated that assisting clients in mortgage modification matters is the practice of law in South Carolina when performed by a lawyer.

Friedman Law represented to Emery that assisting clients in mortgage modifications is not the practice of law and that its network of lawyers in other states satisfied the requirements of multijurisdictional practice.

The Court stated that regardless of whether a particular state had adopted a rule permitting multijurisdictional practice and regardless of whether the particular state had determined that loan modification assistance was the practice of law, the fee agreements repeatedly referred to the services as “legal services”. In other words, the clients believed they were being represented by an attorney.

The Court said that Emery was involved in the systematic and continuous presence in other states, which constituted the unauthorized practice of law.

Accepting mortgage modification cases across state lines may be possible in certain circumstances, but these cases are obviously fraught with hazards. DO NOT accept these cases without carefully examining the federal and state laws involved in each situation and without carefully supervising each person who touches the cases. The best advice may be to never accept these cases when they involve properties located outside of South Carolina.

 

*In the Matter of Bacon, S.C. Supreme Court Opinion 27710, April 19, 2017; In the Matter of Emery, S.C. Supreme Court Opinion 27712, April 19, 2017.

**Crawford v. Central Mortgage Co. and Warrington v. Bank of America, 404 S.C. 39, 744 S.E.2d 538 (2013)

Hot off the presses UPL case!

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(But it only affects real estate peripherally)

The South Carolina Supreme Court handed down a UPL decision in a declaratory judgment action in its original jurisdiction on February 22.*

The Court accepted the action to determine whether Community Management Group, LLC and its employees engaged in the unauthorized practice of law while managing homeowners’ associations. The Court found that the respondents did, in fact, engage in UPL. At the outset of the case, the Court had issued a temporary injunction halting the offending activities.

Community Management Group, without the involvement of an attorney, prepared and recorded notices of liens and related documents; brought actions in magistrates’ courts to collect debts; and filed the resulting judgments in circuit courts. The entity also advertised that it would perform these services “in house”.

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In a 1992 administrative order entitled In re Unauthorized Practice of Law Rules Proposed by South Carolina Bar**,  the Court had modified prior case law to allow a business to be represented by a non-lawyer officer, agent or employee. The Court had also promulgated South Carolina Magistrate Court Rule 21, which provides, “A business…may be represented in a civil magistrates’ court by a non-lawyer officer, agent or employee…”

The central question in the action at hand was whether the word “agent” in these authorities includes third party entities and individuals like Community Management Group and its employees. The Court held it does not and was never intended to.

The Court had earlier held that filing claims in probate courts does not amount to UPL, but stated in the present case that it is the character of the services rendered that determines whether the services constitute the practice of law. Filing claims in Probate Court, according to the Court, does not require the professional judgment, specialized knowledge or ability of an attorney. The Court found that the services required to represent a business in magistrates’ courts are not comparable to filing claims in probate courts.

Community Management Group conceded that it prepared a lien document for the purpose of putting a cloud on title so property could not be sold unless the homeowner paid overdue assessments. This stated purpose demonstrated to the Court that the lien documents were “instruments”, that is, written legal documents that define rights, duties, entitlements or liabilities.

Citing a 1987 case near and dear to the hearts of all South Carolina dirt lawyers, State v. Buyers Service***, the Court reminded us that preparing and recording legal documents is the practice of law.

This current case is a Per Curiam decision, but acting Justice Pleicones did not participate. We are holding our collective breath to learn the results of a Quicken Loan case pending in the original jurisdiction of the Court, and the present case may give us at least a small hint.

stay tunedWe have already received an underwriting question about this case in our office. We were asked whether our attorney agents can ignore the liens filed in contravention of this case. The answer is that we can discuss the specifics on a case-by-case basis, but it appears that although the liens may be invalidated by a court, dirt lawyers and title companies should not generally take this risk without the involvement of a court. If you run into this issue in connection with your closings, call your title insurance underwriter to discuss your options!

*Rogers Townsend & Thomas, PC v. Peck, South Carolina Supreme Court Opinion 27707 (February 22, 2017)

**309 S.C. 304, 422 S.E.2d 123 (1992)

***292 S.C. 286, 468 S.E.2d 290 (1987)

Georgia On My Mind

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GA Supreme Court takes a page from our playbook and prohibits “witness only” closings

On September 22, 2014, The Supreme Court of Georgia issued an opinion approving the State Bar’s Formal Advisory Opinion No. 13-1, which states that a Georgia licensed lawyer may not ethically conduct a “witness only” closing.

georgia with flagThe Court indicated a “witness only” closing occurs when an individual presides over the execution of closing documents but purports to do so merely as a witness and notary and not as someone who is practicing law. In order to protect the public from those not properly trained or qualified to render these services, lawyers are required to “be in control of the closing process from beginning to end,” according to the opinion.

The opinion also requires the closing attorney to review the closing documents, resolve errors in the paperwork, and detect and resolve ambiguities in title and title defects, indicating, “A lawyer conducting a real estate closing may use documents prepared by others after ensuring their accuracy, making necessary revisions, and adopting the work.”

The closing lawyer must “review and adopt” the work used in a closing, even if he or she didn’t prepare that work.  Georgia law allows title insurance companies and others to examine title records, prepare abstracts and issue related insurance.  And other persons may provide attorneys with paralegal and clerical services, so long as “at all times the attorney receiving the information or services shall maintain full professional and direct responsibility to his clients for the information and services received.”

The obligation to review, revise, approve and adopt documents used in closings applies to “the entire series of events that comprise a closing.”

I’m a South Carolina dirt lawyer, so I don’t have the background to comment at length on this opinion, but from my bank of the Savannah River, it seems this opinion places closing lawyers in a precarious position, not unlike the position of our Bidding on a homepractitioners. We don’t necessarily have to perform all aspects of closings, but we do have to supervise and take professional responsibility for the entire closing.  We have learned how difficult it is to supervise third parties and take responsibility for their work.  The Georgia Bar asked for this opinion.  I hope they like it!

Surely Dave Whitener is smiling down from heaven at this effort to rein in the unauthorized practice of law!